U.S. judge will not enforce Mexican glassmaker restructuring

June 13, 2012|Reuters

(Reuters) - A U.S. bankruptcy judge refused on Wednesday to enforce part of a Mexican court's bankruptcy reorganization of glassmaker Vitro, which has been bitterly opposed by U.S. hedge funds that hold its debt.

Vitro, which filed for bankruptcy protection at the end of 2010 after heavy losses on derivatives, has been entangled in a lengthy battle with debt holders who say its Mexican restructuring plan wrongly discharges debts of Vitro subsidiaries that were not in bankruptcy.

In a victory for the funds, Judge Harlin Hale of the U.S. Bankruptcy Court for the Northern District of Texas said he would not enforce that aspect of the plan because it runs contrary to U.S. public policy.

"Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case," he wrote.

A Vitro spokesman, Roberto Riva, said the company would appeal the decision. Hale stayed his ruling until June 29 to give the company an opportunity to file its appeal.

"Vitro's financial restructuring was fully consistent with Mexican law, which has been consistently recognized and respected in the U.S.," Riva said in a statement.

A Mexican court earlier this year approved Vitro's $3.4 billion restructuring plan in spite of opposition from U.S. funds that hold Vitro debt.

Vitro won creditor approval for its plan with the support of debt held within the corporate family, known as intercompany claims.

The funds argued those claims were manufactured to deprive them of their vote.

"Vitro secretly created the intercompany claims through an audacious alchemy of paper-shuffling and creative accounting," the funds charged in court documents.

Vitro had been seeking a ruling that would prevent the U.S. funds, including Aurelius Capital and Elliott International, from attacking the Mexican reorganization in various U.S. courts, where the funds had sought the turnover of Vitro property.

The Monterrey-based glassmaker, which makes everything from beer bottles to perfume containers for luxury brands, argued that the funds were simply unhappy with a Mexican reorganization process that differs from that in the U.S.

But Hale said enforcing the plan would "create precedent without any seeming bounds."

"What is to prevent this type of plan from eventually giving non-consensual releases to discharge the liabilities of officers, directors, and any other person?" he wrote.

"This is a tough test of chapter 15," said Rafael X. Zahralddin, a Wilmington, Delaware bankruptcy attorney with Elliott Greenleaf who is not involved in the Vitro case. He said the judge had to weigh whether the Mexican law was manifestly contrary to U.S. law, and the fact that Vitro's restructuring favored stockholders over bondholders. Chapter 15 is part of the U.S. bankruptcy code that deals with cross-border bank bankruptcies.

A lawyer for the debt holders declined to comment on the decision.

Last week Vitro said it would also seek bankruptcy protection for its subsidiary in Spain which is struggling with debt payments after business has slowed in Europe.

The case is In re: Vitro, S.A.B. de C.V., U.S. Bankruptcy Court, Northern District of Texas (Dallas), No. 11-33335.